1

This report and the information contained within is provided on an “as-is” basis and is for reference only.

No statement, representation or warranty of any kind is given by the Hong Kong Monetary Authority (HKMA), whether express

or implied, including as to the accuracy, correctness, completeness, title, non-infringement, reliability, security, timeliness and

appropriateness of this report for its use in any particular circumstances.

Nothing in this report constitutes legal, financial or other professional advice.

You should conduct your own enquiries to verify the information contained in this report before using it, and seek professional

advice as you consider necessary. The HKMA shall not be liable for any errors, omissions, misstatements or misrepresentations

(express or implied) concerning any information contained in or any aspect of this report.

This report was published by the Hong Kong Monetary Authority with contributions from:

2

Table of Contents

04

06

07

09

11

Foreword

Executive Summary

1 Introduction to Project e-HKD

2 e-HKD Pilot Programme

3 Case Studies: Potential Use Cases

3

.1

.2

Overview

Case Studies

Case Study 1: Full-Fledged Payments

Case Study 2: Programmable Payments

Case Study 3: Offline Payments

Case Study 4: Tokenised Deposits

Case Study 5: Settlement Instructions for Web3

Case Study 6: Settlement of Tokenised Assets

23

4 Evaluation

4

.1

.2

Pilot Feedback and Assessment

Technical Considerations: DLT Interoperability and Scalability

3

5

5 Way Forward

3

6 References

3

6

7

Appendix A: Factsheets / Supplementary Reports

Appendix B: Glossary

3

Foreword

The world has witnessed a remarkable evolution in the way we view and use money. With the advent of,

to name a few examples, smartphone-driven transactions, virtual banking, and AI-driven customer

servicing, our expectations on how our money should work for us have continued to rise as we require

faster, more accessible, and more affordable ways of managing and using our money. Hong Kong’s

complex ecosystem of banks, fintech firms, and other industry participants has made remarkable strides

in this regard by continuously innovating in response to ever-changing market demands and trends.

In tandem with these developments, the topic of central bank digital currencies (CBDCs) continues to

permeate the central banking community, with most jurisdictions engaging in some form of work on

retail CBDCs (rCBDCs). When positioned and implemented properly, an rCBDC has the potential to

unlock unrealised economic value by transforming the ways we transact and the systems we transact on.

However, its implementation will require conscious and careful balancing with existing systems, processes

and stakeholders.

The HKMA embarked on Project e-HKD two years ago to study the case for issuing an rCBDC in

Hong Kong. Given the maturity of Hong Kong’s retail payment ecosystem, we opted for a use-case

driven approach to explore where an e-HKD could bring additional value to consumers and businesses.

The e-HKD Pilot Programme launched last year underpins the HKMA’s joint efforts with the industry to

experientially evaluate viable applications.

This report details our key findings and assessment from Phase 1 of the e-HKD Pilot Programme, and it

represents another significant milestone for Project e-HKD. Whilst the HKMA has not decided on whether

or when to introduce an e-HKD, these pilots will enrich our repository of knowledge formed under

Project e-HKD and inform our future policy decisions. We also believe that our experiences and learnings

will facilitate further research and discussion on rCBDCs among policy makers, the industry, and the

international community.

The journey that lies ahead is an exciting and rewarding one. We have fostered a culture of continued

innovation within the industry while maintaining Hong Kong’s stable, long-established banking system.

In this regard, the HKMA commits to ensuring this project addresses the challenges of today and the future.

Howard Lee

DEPUTY CHIEF EXECUTIVE

HONG KONG MONETARY AUTHORITY

4

5

Executive Summary

Central bank digital currencies (CBDCs) have gained significant traction globally, with many central

banks recognising the potential of wholesale and retail CBDCs. The HKMA has been researching CBDCs

as part of its “Fintech 2025” strategy, with a view to increasing Hong Kong’s readiness in issuing CBDCs.

The HKMA embarked on its retail CBDC (rCBDC) journey with Project e-HKD in 2021. As part of the

three-rail approach in paving the way for the potential implementation of an rCBDC in Hong Kong,

i.e. an e-HKD, the HKMA launched the e-HKD Pilot Programme in November 2022. The programme is

a joint effort between the HKMA and the industry to explore and evaluate the commercial viability of

potential use cases for an e-HKD.

This report follows the conclusion of Phase 1 of the programme, and discusses the key findings, learnings,

and the HKMA’s assessment of the conducted pilots. Phase 1 took deep dives into potential domestic

and retail use cases in six categories: full-fledged payments, programmable payments, offline payments,

tokenised deposits, settlement of Web3 transactions, and settlement of tokenised assets. 16 firms

from financial, payment and technology sectors were selected to participate.

While Hong Kong’s retail payment ecosystem currently provides consumers and businesses with a wide

range of payment options enabled by well-established and robust financial infrastructure, the pilots

under Phase 1 uncovered three areas where an e-HKD could add unique value to the current ecosystem.

These are: programmability, tokenisation, and atomic settlement. An e-HKD not only has the potential

to facilitate faster, more cost-efficient, and more inclusive transactions, but it could also unlock new types

of economic transactions. With that said, the potential and prerequisites for realising such unique value at

scale to substantiate the issuance of an e-HKD are subject to market development and further investigation.

In addition, a number of inefficiencies today are the result of longstanding business norms and processes,

rather than deficiencies in technology. An e-HKD, despite its potential use of new technologies, may not

be the cure-all to all inefficiencies.

The HKMA has not yet reached a policy decision on whether or when to introduce an e-HKD. Careful

consideration should be given to the positioning of an e-HKD, as well as the roles that the HKMA and

the industry may take up in implementing and operating an e-HKD. Other factors such as policy and

technical design as well as legal considerations will also need to be studied.

Phase 1 of the e-HKD Pilot Programme has provided valuable insight into the potential use cases for

an e-HKD, and has also raised a number of areas for future study. The HKMA will examine the identified

business and implementation issues in greater depth in the next phase of the e-HKD Pilot Programme.

6

1

Introduction to Project e-HKD

A selection of banknotes issued by the three note-issuing banks in Hong Kong (i.e. The Hongkong and Shanghai Banking

Corporation Limited, Standard Chartered Bank (Hong Kong) Limited, and Bank of China (Hong Kong) Limited). Cash (such

as the banknotes above, and $10 notes and coins issued by the HKSAR Government) is legal tender and an accessible and

reliable means of payment. A central bank digital currency – a digital version of cash – should likewise provide the same

level of accessibility and reliability in the digital economy.

_

_________

The Hong Kong Monetary Authority (HKMA) has

been researching central bank digital currencies

and low-cost manner. This project is well

recognised by the international financial

community, and is expected to enter a minimum

viable product (MVP) phase in 2024.

(

CBDCs) as part of its “Fintech 2025” strategy,

with a view to increasing Hong Kong’s readiness

in issuing CBDCs at wholesale and retail levels

and promoting financial innovation in Hong Kong.

On the front of retail CBDCs (rCBDCs), the HKMA

embarked on its journey with Project e-HKD

in 2021, and has participated actively in cross-

jurisdictional projects.

The HKMA’s exploration of CBDCs dates back

to 2017, when its initial focus was on wholesale

CBDCs (wCBDCs) under Project LionRock.

This project gradually expanded and evolved

into Project mBridge in 2021.

The HKMA previously collaborated with BISIH

HKC and the Hong Kong Applied Science and

Technology Research Institute (ASTRI) on

Project Aurum in creating a prototype two-tier

CBDC system, which comprises a wholesale

interbank system and a retail e-wallet system.

A project report was published in October 2022.

Project mBridge is a joint project between the

HKMA, Bank for International Settlements

Innovation Hub Hong Kong Centre (BISIH HKC),

and three other central banks. It explores the use

of a wholesale, multi-CBDC, distributed ledger

technology (DLT)-based platform to enable

commercial participants to conduct cross-border

business and international trade flows in an efficient

More recently, the HKMA completed Project Sela

with BISIH HKC and the Bank of Israel, and a

report was published in September 2023.

7

This project was a joint rCBDC experiment with

a focus on cybersecurity. It demonstrated the

technical feasibility of an rCBDC architecture that

could promote competition and innovation in

digital payments, by allowing non-bank payment

intermediaries to connect directly to the CBDC

ledger of the central bank.

for the potential implementation of an e-HKD (see

Figure 1). Given the plethora of convenient retail

payment options in Hong Kong, an e-HKD would

need to add unique value to the current payment

ecosystem, for instance, by providing new or

innovative use cases. In this regard, the HKMA has

adopted a use-case driven approach, and launched

the e-HKD Pilot Programme as a key component

of Rail 2 to explore commercially viable use cases

for an e-HKD in collaboration with the industry.

The HKMA also established a CBDC Expert Group

in October 2023 comprising leading academics to

support Hong Kong’s future exploration of key

policy and technical issues surrounding CBDCs,

such as privacy protection, cybersecurity, and

interoperability. This group facilitates collaboration

between the government, industry and academia

on CBDC research as well.

This report follows the conclusion of Phase 1 of

the programme, and discusses the key findings,

learnings, and the HKMA’s overall assessment of

the conducted pilots. Phase 1 focuses on domestic

and retail use cases in six categories: full-fledged

payments, programmable payments, offline

On Project e-HKD, the HKMA has conducted two

rounds of market consultations, one on high-level

technical designs, and the other on key policy

payments, tokenised deposits, settlement of Web3

transactions, and settlement of tokenised assets.

1

and design issues . Respondents were generally

The HKMA has not yet reached a policy decision

on whether or when to introduce an e-HKD.

The lessons learnt from the programme will

provide important insights that will inform the

HKMA in making its decision. The HKMA remains

open-minded towards the design features of an

e-HKD, and will continue to follow international

developments on CBDCs closely and consider

feedback from different stakeholders (in particular

the industry and the general public).

receptive to an e-HKD, although they highlighted

the need to study the commercial viability of use

cases and other issues such as privacy protections

and legal considerations.

Taking into account feedback received during

the market consultations, the HKMA published a

2

,

position paper in September 2022 to set out its

policy stance and outline a three-rail approach

Figure 1 – Three-Rail Approach for the Potential Implementation of an e-HKD

1

See “e-HKD: A Technical Perspective” (October 2021) and “e-HKD: A Policy and Design Perspective” (April 2022)

See “e-HKD: Charting the Next Steps” (September 2022)

2

8

2

e-HKD Pilot Programme

This section discusses the HKMA’s engagement with the industry under

the e-HKD Pilot Programme and the launch of the e-HKD Sandbox

for the development of use cases.

_

_________

The HKMA launched the e-HKD Pilot Programme

in November 2022 and invited industry participants

to submit potential use cases for an e-HKD.

There was substantial interest and engagement

from the industry. Submissions were received from

both domestic and global firms, ranging from small

fintech firms to large financial institutions.

In this connection, participants were granted

the option of using the e-HKD Sandbox. This

sandbox is based on Project Aurum, and it was

developed and launched by the HKMA in

partnership with the Hong Kong Applied Science

and Technology Research Institute (ASTRI).

It offers a technical environment to accelerate

prototyping, development and testing, and is

intended to enable participants to deep dive

into their use cases, examine implementation

and design issues relating to an e-HKD, and

gain actual experience.

Following an assessment based on pre-defined

criteria (see Figure 2), the HKMA decided to focus

on domestic and retail use cases in Phase 1 of the

e-HKD Pilot Programme. Other use cases which

were received (such as corporate use cases) may

be explored in future phases of the programme.

Participants also had the option of using the

HKMA’s Fintech Supervisory Sandbox (FSS).

The FSS allows banks and their partnering

technology firms to conduct pilot trials of their

fintech initiatives involving a limited number of

participating customers, without the need to

achieve full compliance with the HKMA’s

supervisory requirements.

1

6 firms from financial, payment and technology

sectors were selected by the HKMA to participate

in Phase 1. Their use cases spanned six categories,

namely: full-fledged payments, programmable

payments, offline payments, tokenised deposits,

settlement of Web3 transactions, and settlement

of tokenised assets. A commencement event was

hosted on 18 May 2023 to kick-start the pilots.

Whilst participants were granted flexibility by

the HKMA in designing a hypothetical e-HKD

for use in their pilots, their designs may not

necessarily translate into the final design of an

e-HKD, should it be issued. A number of relevant

technical considerations are discussed in this report.

For Phase 1, pilot participants were granted

flexibility in determining the scope of features,

technical design, and other design aspects of

a hypothetical e-HKD for use in their pilots.

9

Figure 2 – Assessment Criteria for Use Cases

Forefront of

innovation

The solution should showcase

innovative elements and differ

significantly from existing market

offerings (such as a new business

model, market, or version of an

existing product).

Customer-centric

The solution should enhance the

overall customer experience or

solve their existing pain points.

Readily testable

The solution should allow for

market testing with select group(s)

of customers. Relevant risks

should be identified with

appropriate mitigants in place,

and sufficient resources including

capital and manpower

should be committed.

Regulation-

compliant

The solution should

be compliant with existing

licensing requirements.

Hong Kong-

centric

The solution should maximise the

potential use of an e-HKD.

10

3

Case Studies: Potential Use Cases

Phase 1 of the e-HKD Pilot Programme took deep dives into

potential use cases for an e-HKD in six categories, namely full-fledged

payments, programmable payments, offline payments, tokenised deposits,

settlement of Web3 transactions, and settlement of tokenised assets.

This section discusses these potential use cases as proposed by pilot

participants in the form of six case studies.

_

_________

3.1 Overview

A total of 16 firms were selected to participate in Phase 1, conducting a total of 14 pilots across

3

six categories (see Table 1) . Details of each pilot may be found in the factsheets / supplementary

reports prepared by pilot participants, accessible via the links in Appendix A.

Table 1 – Summary of Pilots by Category and Participant

Category

Pilot Participant(s)

(

1) Full-Fledged Payments

2) Programmable Payments

The Hongkong and Shanghai Banking Corporation Limited

Alipay Financial Services (HK) Limited⁴

ARTA-Emali HK Limited

(

Bank of China (Hong Kong) Limited

China Construction Bank (Asia) Corporation Limited

Hang Seng Bank Limited ⁴

(

3) Offline Payments

Giesecke+Devrient

Standard Chartered Bank (Hong Kong) Limited

Industrial and Commercial Bank of China (Asia) Limited

4) Tokenised Deposits

Hang Seng Bank Limited

The Hongkong and Shanghai Banking Corporation Limited

Visa Inc.

(

5) Settlement of Web3 Transactions

6) Settlement of Tokenised Assets

Mastercard Asia/Pacific Pte. Ltd.

Fubon Bank (Hong Kong) Limited

Ripple Labs Inc.

Boston Consulting Group

HKT Payment Limited

ZA Bank Limited

3

A number of pilots have evolved beyond their original category since the HKMA’s announcement on 18 May 2023 and

this has been reflected accordingly.

4

AlipayHK and Hang Seng Bank have each conducted two pilots under the category of “Programmable Payments”.

11

3.2 Case Studies

This section discusses the potential use cases for

an e-HKD as proposed by pilot participants in the

form of six case studies. These pilots are neither

indicative nor definitive of the functionality,

architecture or positioning of an e-HKD, should

it be issued. These use cases are only intended to

facilitate the HKMA and the industry in evaluating

the commercial viability of an e-HKD. Furthermore,

neither this report nor the pilots are conclusive

of any resulting roles or responsibilities that

different stakeholders (such as the HKMA and

the Government of the Hong Kong Special

Administrative Region (HKSAR Government))

may take up in implementing and operating an

e-HKD, should it be issued.

lengthy payment chain and the use of net

settlement for card networks and similar solutions

(for instance, settling once a day at day-end).

HSBC explored in their pilot the use of a private

5

blockchain network to transact hypothetical e-HKD

between consumers and merchants, with the

objective of testing instant, final settlement at a

transaction level. This can remove the need for

frequent liquidity management payments for

settlement purposes. Through this network, both

consumers and merchants would be able to bypass

today’s intermediaries to enjoy a quicker and more

efficient settlement process, as well as potentially

lower transaction costs.

Case Study 2: Programmable Payments

Case Study 1: Full-Fledged Payments

Programmable payments allow conditions to

be imposed to govern when and how payments

should be initiated. Such conditions are typically

Physical cash is the only type of central bank money

available to the general public today. An e-HKD

would be a new form of central bank money

and akin to a “digital cash”, preserving the same

characteristics as physical cash such as negligible

transaction cost and instantaneous settlement

finality. An e-HKD would also serve as a full-fledged

payment alternative, enabling money to be stored

and transferred in a similar manner to physical

cash and other electronic means of payments

6

implemented through the use of a smart contract

in conjunction with application programming

7

interfaces (APIs) . Programmable payments are

not new and are already used to facilitate direct

debit and recurring payments. However, in their

current form, they only support simple and

8

unidirectional payments (such as bill payments )

which are triggered regardless of whether the

underlying service has been provided.

(

such as via the Faster Payment System (FPS),

credit cards, and e-wallets).

In contrast, smart contracts enable consumers

and businesses (such as merchants) to directly

embed instructions into an electronic contract to

initiate payments once pre-defined conditions

are fulfilled. These conditions could include the

amount to be paid and the frequency of payments

in relation to the level of service provided.

In addition to these baseline characteristics, an

e-HKD could potentially enable payments to be

settled in a cost and time-efficient manner by

bypassing intermediaries typically involved in an

electronic payment flow. Currently, merchants may

not receive funds in real-time, and may also be

exposed to reconciliation errors in the event of

erroneous transactions. This is often due to a

Smart contracts also allow for the multidirectional

5

Blockchain is a type of distributed ledger technology (DLT). DLT refers to a technology architecture where a ledger is

replicated across multiple entities, allowing records to be simultaneously accessed, validated and updated.

6

A smart contract refers to an agreement between participants where the terms, predetermined conditions and outcomes

have been coded into a computer program, enabling the agreement and its associated outcomes to be automatically executed

when certain conditions have been met.

7

An API is a software interface enabling two or more programs (which may be running on the same or different systems) to

communicate with each other.

8

When a customer instructs their bank to make a recurring payment, the bank programs related conditions (such as the

frequency of payments) into their own system, which then initiates the payments as specified. The resulting payments do not

contain these conditions.

12

exchange of information on whether the said

conditions have been fulfilled. This could enable

the release of a payment to be automatically

performed once the consumer has electronically

acknowledged receipt of a service.

Whilst this characteristic of embedding in

programmable money can be operationally

beneficial, a programmable money may potentially

undermine the public’s trust in the legal tender.

Given the restrictions on how and when it can

be spent, it could be considered less valuable

compared to other forms of money such as

physical cash. Furthermore, it may not be easily

transferrable into a less restricted form of money.

The topic of what constitutes programmable money

as well as whether central banks should issue

programmable money is a controversial one, and

Programmability Concepts

“

Programmable payments” are often explored

by central banks in conjunction with the concept

of “programmable money” for two different means

of implementation. Both of these concepts fall

under the umbrella of “programmability”, which

generally refers to the ability of a software

application or hardware device to accept and

execute a set of code. However, in the context of

payments and related concepts, “programmability”

is considered ill-defined.

9

entails legal issues which will require further study .

With this in consideration, a programmable

1

0

e-HKD incorporating smart contract functionality

could unlock new modes of business transactions

between consumers and businesses, and encourage

wider adoption of conditional settlements for

retail payments. Conventional payment systems

currently lack functionality to allow for this level

of programmability at scale, particularly in the

In programmable payments, the money that is

transferred merely serves as a form of value.

Although such payments are only initiated as a

result of fulfilling certain pre-defined conditions,

there are no restrictions imposed on how the

money can be spent. This also means that the

integrity of a payment can be compromised if there

are issues like loss, fraud or errors at the point of

initiation. This is in line with how physical cash and

electronic payments work today, where physical

and electronic controls are typically implemented

to control access to money, but the money can

generally be used for any purpose as long as it is

in one’s possession.

1

retail space. In the institutional space, escrows

enable complex transactions to be performed in

accordance with pre-agreed conditions, but

they entail substantial overhead and complexity

since the escrow agent has to manually validate

each condition and effect the resulting actions

and payments.

Consumer Protections

A programmable e-HKD could improve consumer

protections and promote trust between consumers

and businesses by leveraging the rich functionality

of smart contracts.

In contrast, programmable money involves

embedding the pre-defined conditions into the

money itself, meaning that it will retain its pre-

defined conditions regardless of who it is

transferred to. Typically, these pre-defined

conditions are used to restrict how the money can

be spent. An analogy is a store-purchased voucher

that can only be used on certain goods within the

store, regardless of who is holding the voucher.

In Hong Kong, smaller merchants tend to prefer

cash in advance for goods/services, as it benefits

the merchant in terms of cash flow. However, this

exposes the consumer to the risk of losing their

funds, or the risk of the merchant not delivering

the promised goods/services (such as in the event

of bankruptcy or merchant malpractice).

9

Although this case study is titled “Programmable Payments”, this report does not distinguish whether a given pilot makes use

of a hypothetical e-HKD as a programmable payment or a programmable money (along with any other related concepts). It also

does not indicate or conclude which concept may apply to an e-HKD.

1

0

The term “programmable e-HKD” applies solely in the context of this report, and refers to a hypothetical e-HKD incorporating

programmability features.

1

An escrow is where a trusted agent to one or more parties to a transaction holds assets (such as funds and securities) and

only releases them when conditions have been met.

13

In this regard, a programmable e-HKD could offer

an option for consumers to make phased payments

for goods/services and to safeguard their funds.

Whilst some businesses may view escrows to

be operationally intensive, willing businesses may

use this to demonstrate integrity and differentiate

themselves from other businesses to attract

potential business (especially when the business

is building initial consumer trust). However, without

the benefits of advanced cash flows, merchants may

have to adjust their pricing or financing models.

(

1) China Construction Bank (Asia) (CCB (Asia))

and (2) Bank of China (Hong Kong) explored in

their pilots the viability of a “retail escrow” product

using a hypothetical e-HKD for holding consumer

prepayments towards the purchase of a good

or service (see Figure 3). An e-HKD could enable

escrow to be scaled as no agent is needed to

manually perform validation and payment release.

After the consumer has prepaid their funds,

the funds can be held in escrow and disbursed

automatically to the business only when the

conditions have been satisfied.

Loyalty Programmes and Targeted Spending

A programmable e-HKD could enable merchants

to elevate their loyalty programmes, obtain better

consumer insights, and enhance their targeted

marketing spending.

The current retail payment ecosystem places

the onus of building, tracking and executing

programmes solely on the merchant, requiring

them to either engage a service provider to

integrate these services into their payment

channels, or dedicate operational and technical

resources to manually apply discounts and track

rewards for each transaction. Larger merchants

are, as a result, at an advantage as they benefit

from economies of scale in terms of consumer

insights, resources and tools to determine how

to best deploy their programmes.

This creates an incentive for the business to

maintain a good level of service and build strong

initial consumer trust, as they have yet to receive

the funds (but they can ascertain the consumer

has paid). This in turn means that in the event of

a business default, the consumer is no longer

exposed to the risk of losing their funds.

CCB (Asia) also explored the use of a hypothetical

e-HKD for subscriptions which operate in a similar

manner to prepayments where instead of an

upfront prepayment, a recurring amount is

disbursed to the business with the option of

triggering a refund mechanism as needed.

A programmable e-HKD could level the playing

field for smaller merchants by providing low-cost

access to similar capabilities, such as the automatic

Figure 3 – Prepayment and Subscription using e-HKD

14

dispensing and acceptance of rewards at the time

of sale. This streamlines the consumers’ experience

when making payments, encouraging loyalty and

repeat business whilst freeing up operational

resources on the part of merchants. In addition,

an e-HKD could embed useful consumer identifiers

allowing merchants to better allocate targeted

spending to attract their intended consumers.

However, such new functionalities would require

businesses to have certain technical competence

in creating and maintaining the programme codes.

New infrastructure may also be needed (for

Investments

A programmable e-HKD could enable investors to

enjoy a faster turnaround and a closer to real-time

market price when subscribing to investment funds.

Investors typically complete a number of processes

when subscribing to a fund such as checks, pre-

funding, and order placement and settlement.

The process today of fulfilling investment fund

orders is not instantaneous, as the fund manager

is only obligated to fulfil the order by day-end after

receiving the investor’s prefunding. As a result, pre-

fulfilment steps such as obtaining a market price

for the fund may not be performed instantaneously.

instance, to onboard and categorise merchants).

(

1) Hang Seng Bank, (2) HSBC¹ ² and (3) AlipayHK

explored in their pilots the viability of a low-cost

alternative for merchants of all sizes to build

and execute their loyalty programmes using a

hypothetical e-HKD. Through the use of smart

contracts, merchants of all sizes can offer discount

and reward programmes to consumers without

additional ongoing effort in managing these

programmes, with the option of automatically

applying discounts at the time of sale. This in

turn enables merchants to dedicate resources to

programme optimisation instead of execution.

An e-HKD being common to financial institutions

could also enable merchants to target first-time

consumers more accurately and cost-effectively

irrespective of the payment channel or financial

institution used.

ARTA-Emali explored in their pilot the atomic

settlement of a fund order using a hypothetical

e-HKD, and the ability to integrate operational

processes involving upstream and downstream

investment intermediaries (for instance, placing

agents, fund managers, fund administrators) in a

straight-through manner through the use of smart

contracts (see Figure 4). The pilot also explored the

integration of investors’ credentials with the smart

contract using decentralised identities, in order

to further streamline onboarding processes prior

to the fulfilment of an order.

Shortly after an investor initiates a fund investment

order, their e-HKD is escrowed in a smart contract-

based vault. The e-HKD is only released to the fund

manager when the fund manager delivers the

tokenised funds to the investor.

Figure 4 – Fund Investment using e-HKD

1

2

This is a continuation of their pilot in Case Study 1.

15

An e-HKD has the potential from a technical viewpoint

to unlock new ways of transacting, integrating payment

processes, and mitigating risk for both consumers and

businesses, in turn enabling businesses to focus on

product innovation rather than execution.

Under this delivery versus payment (DvP) model,

the fund manager is exposed to less risk as they

have the knowledge and confidence that the

investor has already prefunded their order. The fund

manager also has an incentive to obtain the market

price and satisfy the order as quickly as possible to

receive the investor’s funds. This mode of straight-

through atomic settlement can reduce operational

overhead. The investor in turn can enjoy faster

order execution and a timelier entry to the market,

allowing them to potentially benefit from an extra

day of interest income, say with the purchase of a

tokenised bond.

operationally-intensive on the part of each SVF

operator as they have to independently configure

their platform to effect the intended use of the

funds, and they will also need to reconcile the

funds after it has been used by recipients.

Furthermore, merchants generally do not receive

the funds in real-time via the SVF, and recipients

of the funds are limited to the merchants available

on the SVF that they have selected, without an easy

option of switching their remaining vouchers to

another platform.

(

1) AlipayHK and (2) Hang Seng Bank¹ ³ explored

in their pilots a more cost and operationally-

efficient mechanism to disburse government

subsidies using a hypothetical e-HKD.

The government first programs the scope of

distribution (such as the list of whitelisted

merchants) and other relevant conditions into the

smart contract, before tokenising and distributing

the funds to designated parties for onward

distribution to the intended subsidy recipients.

Fund Ring-fencing, Government Disbursements

A programmable e-HKD could embed fund

ringfencing and tracking functionality, enabling

funds with designated spending conditions to be

safekept, spent and tracked without requiring the

funds to be confined to a single commercial

payment channel. This can be of use where the

issuer of a given set of funds may not have a

particular affiliation with a commercial payment

channel, for instance, the government in issuing

subsidies, reimbursements and consumption

vouchers to the public. Payment recipients would

nevertheless still have their own e-HKD wallet.

This streamlined process enables the issuer of

the funds (being the government in these pilots),

SVF operators (as the case may be) and merchants

to lower their cost of implementation, and also

enables merchants to receive funds in real-time

as the smart contract configured by the

government is updated in real-time when the

voucher recipient spends the subsidy. This can

enable both the government and subsidy recipients

to enjoy greater visibility of their use of funds,

whether at the programme or individual level.

There are few options today to facilitate fund

ringfencing and tracking without resorting to single

payment channels or dedicated agents (such as for

the escrow product). One such option is to disburse

the funds to stored value facility (SVF) operators,

who then configure their platforms to restrict how

the funds can be spent on their platforms. This is

1

3

This is a continuation of their pilot in Case Study 2, Loyalty Programmes and Targeted Spending.

16

Case Study 3: Offline Payments

In-person transactions settled through electronic

means of payments in real-time generally require

network connectivity. Despite high cellular network

penetration in Hong Kong, an intermittent or lack

of network connectivity in some situations could

prevent the use of an electronic means of payment

which relies on real-time validation (such as a

payment terminal supporting settlement using a

credit card or mobile wallet). This can ultimately

impact the customer experience and transaction.

This also applies to consumer-business transactions

and peer-to-peer transactions.

Accordingly, whilst an e-HKD could serve the role

of a “digital cash” as discussed in Case Study 1,

it may not be the sole solution to overcome the

inertia of some consumers and merchants in

adopting electronic payments. Other factors could

also dilute the value proposition of an e-HKD,

like charging fees to create incentives for merchant

acquirers and technical service providers (involved

in using and supporting an e-HKD ecosystem).

(

1) Standard Chartered Bank (SCB) and

Giesecke+Devrient (G+D) and (2) ICBC (Asia)

explored in their pilots the storage and transacting

of e-HKD via physical and electronic mediums for

transactions between consumers and businesses

across offline and online contexts (see Figure 5).

A hypothetical e-HKD is stored using secure

elements within smartphone wallets and physical

smart cards. This can then be transacted offline

using proximity-based technologies such as near-

Similarly, whilst smartphone penetration in

Hong Kong has already reached 97% as of 2022,

certain segments of the population may not have

access to a smartphone, or prefer to conduct

transactions in-person using cash. This could be

the result of ingrained behaviours, a steep learning

curve, or upfront and ongoing costs. This applies

equally to businesses that may be reluctant or

even unable to justify electronic means of

payments, given that cash already satisfies their

current needs by enabling them to settle in an

intuitive and resilient manner.

1

4

field communications (NFC) with safeguards

1

5

against double-spending . These offline

transactions are settled with finality and funds

can be used immediately in subsequent offline

transactions. This is in contrast to certain payment

schemes where transactions are reconciled at day-

end and netted for settlement later.

Figure 5 – Offline Payments

In SCB and G+D’s pilot, the mediums are designed

to enable secure and consecutive dual offline

1

6

payments in persistently offline settings. This

allows for funds settled offline to be immediately

available for use in subsequent offline transactions,

with the flexibility of allowing offline payments to

be synchronised online in a seamless manner when

connectivity is available.

1

4

NFC allows for the contactless communication between devices over short distances and is often triggered by holding the

NFC reader of two devices closely together.

1

5

This is enabled by cryptography, software and hardware-level protections. This asynchronous characteristic would typically

be guarded against fraudulent transactions initiated by malicious actors by assigning a digital signature to each digital wallet

owner (such signature being computationally infeasible for malicious actors to replicate). Each transaction would need to be

digitally signed and validated before it can be posted onto an e-HKD digital wallet or network.

1

6

A dual offline payment is when both parties to the transaction are offline.

17

Tokenised deposits have the potential to transform

transactions in terms of visibility and execution efficacy,

by enabling transacting parties to integrate separate

processes, stakeholders, and data points into a

unified, end-to-end flow.

Case Study 4: Tokenised Deposits

“

Tokenised deposits” is a developing area

Tokenised deposit payments bear many similarities

to today’s processes in effecting interbank transfers.

Nevertheless, they can facilitate financial institutions

in enabling their consumers and business users to

reconcile transactions faster and with greater

transparency through richer, end-to-end integration

across different systems. This is in contrast to

existing payment processes and systems which

may not provide the same level of end-to-end

integration. Financial institutions and other

1

7

relating to tokenisation . It currently does not

have a universal industry definition or standard,

but is generally understood to refer to digital

representations of bank deposits where money

deposited with a bank is minted on that

institution’s own blockchain ledger with the backing

of that financial institution‘s balance sheet .

When a depositor transfers their tokenised

deposits to another institution, the institution can

hypothetically make an interbank transfer using a

wholesale CBDC (wCBDC) to the beneficiary’s

financial institution on the HKMA’s ledger whilst

simultaneously burning the token on their own

ledger. Like bank deposits today, tokenised

deposits are intended to be a claim on the relevant

bank and not the central banking institution.

intermediaries may also apply additional checks

on payment receipts resulting in funds not being

immediately credited to say, a business.

In addition, payments may not be supported

post business hours or during the weekend.

Transacting parties may also be required to

manually track and complete costly reconciliations.

As a result, transacting parties may incorporate

additional processes to manage liquidity, reconcile

flows based on different data sources, and prepare

onward payment instructions for processing.

These processes can unpredictably prolong the

execution of a business transaction.

Whilst tokenised deposits and e-HKD are

conceptually separate in terms of backing, and

tokenised deposits may be issued without involving

an e-HKD, this case study pools these together

to examine how different tokenised deposit

implementations could be integrated within

the same ecosystem.

1

7

Tokenisation (in the context of blockchain technology) refers to the process of converting the ownership rights to an

asset into a digital form.

1

8

9

Minting refers to the process of creating new tokens, whilst burning refers to the process of destroying existing ones.

The use of the term “tokenised deposit” and the characteristics described in this report in relation to a “tokenised deposit”

apply solely in the context of the pilots described in this report, and are not intended to indicate or conclude what constitutes

a “tokenised deposit”.

18

Figure 6 – Tokenised Deposits with wCBDC Settlement

In a global first, Visa alongside Hang Seng Bank

and HSBC explored in their pilot the atomicity

and interoperability of on-us and cross-chain

payments across a variety of business scenarios

using tokenised deposits (see Figure 6).

could also be useful for expanded intrabank

use in the future such as intragroup liquidity

management and accounting.

2

0

Case Study 5: Settlement Instructions

for Web3

Where tokenised deposits are used in conjunction

with a hypothetical wCBDC, transactions could

potentially be settled around-the-clock and in an

atomic manner from end to end. This represents an

improvement compared to the limited availability

of conventional payment systems and the variable

number of dependencies imposed by intermediaries

in further processing the transactions. This in turn

improves liquidity management for the transacting

parties because of reductions in settlement times

and collateral usage, and enhances the overall level

of transparency by allowing transacting parties to

check the status of the transaction in real-time and

identify pending transactions for follow-up.

Web3 is the overarching theme for the next

generation of the internet, with a focus on the

concepts of decentralisation, tokenisation and

blockchain-based platforms. It has led to the

emergence of new types of transactions involving

decentralised applications and digital assets

such as non-fungible tokens (NFTs). Depending on

the marketplace or exchange, many platforms may

only accept “cryptocurrencies” and stablecoins

which may not be readily accessible. Furthermore,

off-chain funding arrangements via fiat may entail

lengthy and complex processes.

2

1

In this regard, an e-HKD could act as a bridge

between the conventional fiat economy and

the new Web3 economy, and in turn promote the

development and adoption of Web3. To facilitate

this, an e-HKD could support direct integrations

with decentralised applications and blockchain

The use of a global correspondent network built

using distributed ledger technology (DLT) also

opens the use of tokenised deposits beyond just

payments. A programmable token for financial

institutions to integrate into their own workflows

2

0

On-us refers to a payment where the initiating and receiving financial institution are the same and there is no interbank

movement of funds. This is also referred to as a book transfer.

2

1

Excluding the FPS where retail peer-to-peer transactions are expected to be credited to the recipient in real-time.

19

networks, to allow for more seamless funding into

and withdrawal out of Web3.

Case Study 6: Settlement of Tokenised Assets

Tokenisation has begun to make inroads into the

conventional economy, with an increasing number

of real world assets eligible for representation in

a digital form.

Mastercard explored in their pilot the “wrapping”² ²

of e-HKD for use on a non-native blockchain (see

Figure 7), by simulating the purchase of physical

items and the contingent exchange of NFTs (each

representing a digital certificate of authenticity for

the physical item) on a tokenised asset network.

This network is a non-native blockchain from the

perspective of the e-HKD.

Through tokenisation, asset owners may discover

new buyers for their assets and be able to engage

more than one buyer as a result of being able

2

3

to fractionalise their assets. In addition, potential

buyers would have greater visibility into the details

and transaction history of each asset, providing

them with greater assurance and certainty.

The process of “wrapping” enables the value of

the e-HKD to be safely used on such network by

intended parties away from its native platform.

In addition, the use of a smart contract also ensures

that the payment is contingent on the successful

delivery of the physical item.

Tokenisation could also be used to represent

legal rights to assets such as title deeds, although

regulatory changes may be needed to facilitate this.

The market for tokenisation is still in its early stages,

and there are many opportunities across asset

classes which have yet to be realised. Where there

is a business case, tokenisation has the potential

to drive the next wave of economic activities.

Figure 7 – Settlement in Web3 using e-HKD

2

As blockchains may not always be interoperable, “wrapping” refers to the conversion process into a token for use on another

blockchain. In Mastercard’s pilot, it is assumed that the e-HKD is based on blockchain architecture.

2

3

Fractionalisation refers to the concept of dividing an asset into smaller units, where each unit represents a proportional

ownership of the asset. This allows more than one person to benefit from the asset (in proportion to what they own).

20

Fubon Bank and Ripple explored in their pilot the

agreed purposes. By tokenising and fractionalising

such rights, borrowers may borrow from more than

one lender (akin to a “retail syndication loan” )

2

4

use of tokenised real estate assets in granting a

2

5

26

home equity line of credit (HELOC) to a real estate

owner using a hypothetical e-HKD (see Figure 8).

When the lending protocol is triggered, property

lien tokens are used as collateral by the bank in

minting a residential mortgage loan, and the loan

amount for drawdown is then credited to the owner

in e-HKD. The process today is operationally-

intensive for lenders and can span multiple systems.

In this connection, the model of token-backed

lending could enable lenders to provide a more

efficient service to potential real estate owners to

realise additional liquidity, which can in turn

encourage uptake of such facilities.

at different interest rates. Borrowers may also be

able to obtain secured lending for smaller nominal

amounts than if they were to borrow from a single

lender. In essence, tokenisation could enable

borrowers to access different lending options and

terms. This could also create a market for smaller

property-backed loans that banks would not

typically entertain. In addition, this model of token-

backed lending could apply to other asset classes,

unlocking liquidity for a range of assets.

Furthermore, it is currently difficult for lenders to

enforce how loan proceeds are spent after their

disbursement. Given that a programmable e-HKD

could facilitate ringfencing of the proceeds, lenders

may be able to offer more competitive interest rates

for loans issued using an e-HKD, as they would be

less exposed to the risk of the loan proceeds being

used for prohibited purposes.

In a similar vein, BCG, HKT Payment Limited and

ZA Bank explored in their pilot the tokenisation

of pledging rights to an asset, and the feasibility

of developing a token-backed secured loan.

The transaction is settled using a hypothetical

e-HKD, and the funds are ringfenced for the pre-

Figure 8 – Tokenisation of Real Estate Assets

2

4

5

In Fubon Bank and Ripple’s initial implementation for their pilot, the tokens represent the property liens for the real estate.

A HELOC is a credit facility extended to a real estate owner allowing them to borrow against (or draw down from) excess

equity in their property.

2

6

Syndication loans are typical for large value institutional transactions due to the interest of multiple parties in financing the

loan, but are less common in the retail space.

21

22

4

Evaluation

This section sets out the HKMA’s overall assessment of the potential

use cases for an e-HKD and related technical considerations following

Phase 1 of the e-HKD Pilot Programme.

_

_________

4.1 Pilot Feedback and Assessment

Hong Kong’s retail payment ecosystem currently

provides consumers and businesses with a wide

range of means to make and receive payments,

and this is enabled by well-established, well-

connected and robust financial infrastructure such

as the Faster Payment System (FPS). With this

in consideration, an e-HKD would need to provide

additional unique value to the current retail

payment ecosystem to substantiate the case for

its issuance, such as applications which can only

be supported by an e-HKD.

such unique value at scale to substantiate the

issuance of an e-HKD would very much depend

on the pace of relevant developments in the retail

payment ecosystem, and accordingly would be

subject to further investigation.

4

.1.1 Programmability

Programmability generally refers to the ability of

a software application or hardware device to

accept and execute a set of code. As this term is

considered ill-defined in the context of payments

and related concepts, the term “programmable

e-HKD” is used solely in the context of this report

to refer to a hypothetical e-HKD incorporating

programmability features.

There are also settlement inefficiencies today which

are the result of longstanding business norms and

processes, rather than deficiencies in technology.

These inefficiencies will need to be addressed to

realise the full potential of new technologies,

and cannot be solved solely by issuing an e-HKD,

despite the technical benefits that it may bring.

Wider adoption of retail conditional settlements

A programmable e-HKD could unlock new types

of transactions for consumers and businesses, by

facilitating the wider adoption of conditional

settlements for retail transactions. This could

create mutual incentives for transacting parties

to complete the transaction in a timelier manner,

which could be useful for certain interactions where

consumers are used to paying in advance.

Based on the learnings and feedback from pilot

participants, including those from users involved

during the pilots, Phase 1 of the e-HKD Pilot

Programme uncovered three key areas where an

e-HKD could add unique value to consumers

and businesses and address their evolving and

future needs. These are: programmability,

tokenisation, and atomic settlement.

An e-HKD could also facilitate “open-loop system”

conditional settlements, where related payment

conditions can apply regardless of the means

used to make the payment. This means transacting

parties can benefit from conditional settlements

without the limitation of having to use the same

It should, however, be noted that the realisation

of such unique value in the pilots may have been

made possible by the presumed existence of the

relevant prerequisites, such as the readiness of

other participants and supporting arrangements in

the ecosystem. However, the potential for realising

2

7

means of payment .

2

7

In contrast, “closed-loop systems” would require transacting parties to use the same means of payment.

23

In the “Consumer Protections” pilots (under Case

Study 2, Programmable Payments), a scalable,

by providing them with more means to attract new

consumer segments and build consumer rapport.

“

retail escrow” prepayment product facilitating

Furthermore, an e-HKD could facilitate “open-

loop system” conditional settlements, enabling

customisations to be applied regardless of the

means used to make the payment. For instance,

consumers would be able to spend vouchers issued

by merchants without the limitation of having to

use a specific e-wallet. With that said, the process

of implementing programmability will likely require

some technical expertise, and businesses will either

need to possess this expertise themselves or

partner with a financial institution or technology

partner that can assist with implementation.

conditional settlements with e-HKD could

incentivise businesses to provide good, consistent

service from the outset to build trust with

consumers, whilst providing consumers with the

confidence to engage with businesses in the

absence of initial trust. The business also provides

the good or service with the confidence that the

consumer has already made or can make payment.

2

8

In one set of surveys , 93% of consumers

responded that conditional prepayments with

e-HKD could alleviate their concerns of losing their

money as a result of a merchant going bankrupt,

whilst 70% of merchants responded that conditional

prepayments with e-HKD would help build loyalty.

In the “Loyalty Programmes and Targeted

Spending” pilots (under Case Study 2,

Programmable Payments), a low-cost alternative

using a hypothetical e-HKD could enable merchants

of all sizes to build and execute their loyalty

programmes. One benefit of note was the potential

of an e-HKD to automate the issuance, tracking

and reconciliation of vouchers and rewards.

In the “Investments” pilots (under Case Study 2,

Programmable Payments), the investor benefits

from faster order fulfilment as the fund manager

has an incentive to fulfil the investment fund order

as soon as possible to receive the investor’s

prefunding. The fund manager is also incentivised

to facilitate conditional settlements as the unified

process enables them to incur less operational

overhead and risk.

3

0

During one pilot’s testing , both consumers and

merchants found the mechanism to automatically

apply rewards to consumers’ transactions easy to

use. Merchants also noted that its low cost and

ability to implement sophisticated and frequent

promotions were attractive features. In another

In this connection, surveyed financial institutions² ⁹

viewed that the benefits of atomic delivery versus

payment settlements, and reduced settlement and

counterparty risk were attractive factors supporting

this mode of conditional settlements using e-HKD.

3

1

survey, 80% of respondents had a favourable

view towards programmability being a unique

feature of an e-HKD, should it be issued.

Flexibility in ringfencing and tracking funds

Level playing field for businesses

Last but not least, a programmable e-HKD could

enable the ringfencing and tracking of funds to

be achieved with greater ease and less operational

overhead. Instead of distributing funds to, for

instance, stored value facilities (SVFs) which then

configure the restrictions on their platforms, the

intended use of the funds could be programmed

from the outset to govern how it can be spent

irrespective of the payment platform. This could

also enable the funds to be used across different

payment platforms, rather than being limited to a

A programmable e-HKD has the potential to

level the playing field for businesses, by allowing

businesses of all sizes to integrate and automate

payment-related processes, as well as to develop

and provide goods or services with a greater degree

of customisation and flexibility. This could benefit

small businesses in particular (which may be limited

by financial, operational or technical resources),

2

3

8

9

0

1

Survey sample: 110 consumers and 10 merchants

Survey sample: 12 financial institutions and a small population of investors

The pilot involved around 150 individual participants, five merchants, and 400+ transactions

The pilot involved over 150 individual participants, seven merchants, and 500+ transactions

24

single payment platform. In a pilot exploring the

ringfencing of loan proceeds (under Case Study 6,

Settlement of Tokenised Assets), around 60% of

surveyed consumers showed interest in loans with

ringfenced proceeds, if it came with incentives such

as a lower interest rate.

crucial foundation to accelerate industry-wide

innovation, and facilitate interoperability between

different implementations of programmability in

the future. Similar work could also be done in the

other key areas of tokenisation and atomic

settlement as discussed in later sections.

In addition, careful consideration should be given

to how the concepts of programmable payments,

programmable money (see Figure 9), or perhaps

an extension of these concepts would apply to an

e-HKD, should it be issued with programmable

features. As discussed in an earlier section, an

e-HKD issued as a programmable money could

run the risk of undermining the public’s trust in

the legal tender and in turn, affect monetary and

financial stability.

Programmability at scale

Whilst programmability brings about a number of

commercial merits, it will be important to consider

how programmability at scale can be achieved.

This refers to the process of creating an ecosystem

with the necessary infrastructure so that businesses

are equipped with the right incentives, resources

and expertise to make the most of programmability.

It may be worthwhile to consider developing a

repository of smart contract templates for common

business activities. Technical frameworks, such

as cross-system protocols and standards for

identifying merchants, would also need to be

developed in collaboration with the industry.

Furthermore, a holistic review of how an e-HKD

could look and feel for the average consumer

would be important for consumer adoption.

The question of whether and how central banks

should implement certain programmability features

at the time of issuing an rCBDC will also require

deliberation, as different features will entail

different levels of risk. For instance, an rCBDC

issued as a programmable money may be more

susceptible to cybersecurity risks, as it may present

more mediums for external threats to inject

malicious code. A delicate balance will therefore

need to be struck between facilitating the industry’s

development of innovative products and services,

and ensuring the overall safety of monetary and

financial systems.

This may involve identifying and specifying core

programmability functions that should be provided

to consumers via, for instance, their e-wallet’s

smartphone application. This work could serve as a

Figure 9 – Programmable Payments and Programmable Money

25

4

.1.2 Tokenisation

Tokenisation (in the context of blockchain

technology) refers to the process of converting the

marginal cost of supporting these new types of

transactions.

3

2

ownership rights to an asset into a digital form .

It has gained popularity in recent years, particularly

in the space of Web3 and real world assets.

When applied appropriately, tokenisation could

enable asset owners to access marketplaces with

increased liquidity, efficiency, and transparency

compared to conventional marketplaces.

Tokenisation is also used by financial institutions

in minting tokenised deposits, which are generally

understood to refer to digital representations of

bank deposits.

Central banks have also continued their study

and work on potential applications for tokenisation,

as the range of assets eligible for tokenisation

continues to expand. In February 2023, the HKMA

supported the HKSAR Government in issuing

the world’s first tokenised government green bond,

and published a report in August 2023 to share the

experience of the issuance with a view to providing

a blueprint to market participants interested in

issuing tokenised bonds in Hong Kong. The report

also outlined potential next steps to promote

the wider use of tokenisation technology in

Backbone for Web3 transactions

3

5

Hong Kong’s bond market .

An e-HKD, were it to be “wrapped” or even

issued on a blockchain, could be used to directly

settle transactions relating to Web3 and tokenised

real world assets. In this connection, an e-HKD

could eliminate the risk of conversion losses and

volatility associated with “cryptocurrencies” and

stablecoins . This is particularly relevant in Web3,

where “cryptocurrencies”, stablecoins and off-chain

arrangements are typically used for marketplace

transactions with no readily available option to

transact, say, using a HKD. In a small-scale survey

conducted with digital natives as part of the

Wider development of token-based systems

As for tokenised real world assets, an e-HKD has

the potential to enable access to increased liquidity

and accelerate the development of innovative

token-based systems within the industry.

3

This could lead to more integrated and faster ways

of conducting core business activities. In one

pilot relating to tokenised real estate assets,

a hypothetical e-HKD was shown to enable faster

approval of loans and consequently real-time,

around-the-clock availability, and automatic

disbursement of funds. These industry-wide

developments could serve as an impetus for

businesses to revisit longstanding norms and

processes, and address non-technical inefficiencies

as part of readying their business to adopt new

technologies to their full potential.

“

6

Settlement of Web3 Transactions” case study,

5% of respondents indicated a strong interest

in using rCBDCs for settling Web3 transactions.

The Government of the Hong Kong Special

Administrative Region (HKSAR Government) issued

a Policy Statement on Development of Virtual

Assets in Hong Kong in October 2022, noting that

an e-HKD could serve as a potential “backbone”

and anchor to bridge legal tender and virtual

These efficiencies could also be achieved in

conjunction with tokenised deposits, which have

the potential to bridge different chains, systems

and applications. Although tokenised deposits and

e-HKD are separate concepts, private sector

innovations and developments relating to an

3

4

assets . Nevertheless, even with these benefits in

mind, businesses will still need to evaluate the

3

2

It is unlikely an e-HKD would be considered a token should it be issued, given it should have the same status as a

“

digital cash” instead of being a digital representation of another form of money.

An e-HKD being an rCBDC would observe the singleness of money, where each e-HKD is always equal to a HKD

3

and the underlying exchange rate between these two forms of money remains constant. In contrast, the value of

stablecoins or “cryptocurrencies” is subject to fluctuations.

3

4

Policy Statement on Development of Virtual Assets in Hong Kong

(

Government of the Hong Kong Special Administrative Region, 2022)

3

5

Report on Bond Tokenisation in Hong Kong (Hong Kong Monetary Authority, 2023)

26

e-HKD could be beneficial to the development of

tokenised deposits and other parts of the retail

payment ecosystem in Hong Kong. For instance,

these innovations could serve as reference for

financial institutions when designing their own

mechanisms for tokenising deposits, which could

help promote interoperability in the future.

A wholesale CBDC (wCBDC) layer could also be

established to facilitate interbank settlements.

automated and seamlessly integrated onto a

common programmable platform that combines

tokenised money and tokenised assets. A unified

ledger established in conjunction with tokenised

deposits and a wCBDC layer could transform

transactions in terms of visibility and execution

efficacy, by enabling transacting parties to integrate

separate processes, stakeholders and data points

into a unified, end-to-end flow.

In addition, an e-HKD could be used in a “unified

ledger”, a concept explored in greater detail by the

Bank for International Settlements (see Figure 10),

where sequences of financial transactions can be

A comparison between an e-HKD, stablecoins,

SVFs, and tokenised deposits is provided in Table 2

in the following pages.

3

6

Figure 10 – Models for Interoperability between Old and New Systems

Payment messaging model

3

6

III. Blueprint for the future monetary system: improving the old, enabling the new

Bank for International Settlements, 2023)

(

27

Figure 10 – Models for Interoperability between Old and New Systems (continued)

Private tokenised ledger model

Full-fledged unified ledger

Source: BIS

28

Table 2 – Comparison of e-HKD, Stablecoins, Stored Value Facilities and Tokenised Deposits

e-HKD

Stored Value

Facilities (SVFs)

Tokenised

Deposits

Stablecoins

(

rCBDC)

Regulated entities

registered with

the HKMA

Authorized institutions

under the

Banking Ordinance

Private, usually

unregulated entities

Statutory authority

User float is fully

segregated from funds of

operators and protected

against claims by other

creditors of SVF issuers in

all circumstances per

Generally 100%

asset-backed by fiat

currencies or other

cryptocurrencies

Commercial bank balance

sheet fulfilling the

appropriate liquidity

coverage ratio (LCR)

Central bank’s

statutory authority

supervisory requirements

Any other accepted user

on the network ready to

receive it, and within

the bank’s KYC/AML

risk appetite

Any other user on

the platform, and also to

users of other

Any other user

ready to receive it

Any other user on the

network

FPS participants

Generally protected by

the Deposit Protection

Scheme, unless otherwise

N/A

3

7

excluded

Legal tender,

exchangeable for

other forms of fiat

Generally redeemable for

fiat money or tradeable to

other users at market rate

Redeemable for fiat money

from the issuer

Repayable in

fiat money

Note: The characteristics relating to an e-HKD are not indicative and do not infer that an e-HKD will be issued. In addition,

the characteristics relating to stablecoins and tokenised deposits are not definitive and should not be interpreted as such,

given that they do not have a clear and legal and regulatory status in Hong Kong.

3

7

Tokenised deposits should generally be protected by the Deposit Protection Scheme unless otherwise excluded

not all deposits are protected deposits).

(

29

4

.1.3 Atomic settlement

Atomic settlement refers to the ability to settle

transactions and exchange assets in a simultaneous,

instant and contingent manner.

commercial interests. In this connection, new

technologies could serve as an impetus for

businesses to revisit longstanding norms and

processes and address non-technical inefficiencies.

“

Last-mile” payment processing

For instance, although the FPS enables real-time

settlement for peer-to-peer transactions, external

payment schemes such as credit cards may not

credit funds instantaneously due to the way these

schemes aggregate transactions for settlement.

Financial institutions may also impose additional

checks and holds on payments before crediting

the funds to businesses, or process payments in

batches instead of real-time.

An e-HKD could work in conjunction with the

current set of financial infrastructure to enable

a wider audience of consumers and businesses to

enjoy the benefits of atomic settlement across a

greater range of transactions. This in turn could

facilitate the adoption of electronic payments.

Although Hong Kong’s retail payment ecosystem

currently provides consumers and businesses

with a wide range of means to make and receive

payments, the “last mile” of payment processing

in crediting funds to businesses may not always be

conducted in real-time. This can deter businesses

that have to closely manage their cash flows from

taking up electronic means of payments.

3

8

In other words, the systems and financial

infrastructure which payments are settled in may

be real-time, but the intermediaries processing

the payments may not be doing so in real-time.

Businesses may also lack well-integrated systems

and processes to support real-time settlement

and reconciliation.

The pain point of “last mile” payment processing

is the result of business, operational and technical

factors. Whilst new technologies can facilitate the

development of faster, more efficient processes,

there is a crucial need for business stakeholders

and intermediaries to review and align their

processes and operational norms. This is necessary

to realise the full potential of efficiencies granted

by new technologies. These norms are typically the

result of past process optimisations (such as

liquidity saving arrangements), or even certain

In addition, external payment schemes may entail

a higher cost than the processing of physical cash,

with processing fees subtracted by relevant

intermediaries. These fees may deter businesses

with thin operating margins – for example, a 3%

interchange fee subtracted from a 10% margin

before other costs is substantial.

Figure 11 – Last Mile Processing

3

8

In the context of payments, the “last mile” refers to the final stages of the payment process where the funds are actually

credited to the recipient (which may take place beyond a payment system such as the FPS).

30

Assuming that businesses are ready to support real-

time settlements and reconciliations, the potential

of an e-HKD in enabling atomic settlement can

be observed in multiple pilots. In the “Full-Fledged

Payments” case study, a hypothetical e-HKD

powered by distributed ledger technology (DLT) not

only could enable merchants to enjoy the benefits

of real-time settlements with consumers (as already

enabled by conventional payment systems), but it

could also mitigate business inefficiencies occurring

outside such systems to an extent by bypassing

intermediaries typically involved in an electronic

payment flow. Merchants may also enjoy lower

transaction fees.

These settlements could also be conducted outside

the operating hours of conventional payment

systems. In comparison, last mile processing after

real-time settlement in conventional payment

systems took comparatively longer (measureable in

hours) and were subject to fixed operating hours.

While these new means of payment could facilitate

faster, more efficient settlements, it will be

necessary to evaluate if the additional benefits

presented could be sufficient to draw consumers

and businesses from existing means of payment.

Adoption of offline payments

An e-HKD could address last mile pain points

which may be amplified in offline settings, where

consumers and merchants may lack perpetual

access to an online network and are forced to

handle settlements offline.

Surveyed merchants held a favourable view towards

the e-HKD if it could enable intraday settlements,

instead of “T+1” (a next day settlement benchmark

generally expected of electronic payments) (see

Figure 11). Merchants noted that this facilitated

more efficient cash flow management, when say,

making daily payments to suppliers.

For instance, dual offline payments via an e-HKD

could help facilitate atomic transactions across

offline and online contexts, and enable an e-HKD

to function as closely as possible to a “digital cash”.

In a survey conducted under the “Offline Payments”

In a similar vein, tokenised deposits could build

on the current set of financial infrastructure,

which already enable atomic settlements at the

interbank level, and bridge settlements to achieve

near-instant, more transparent and around-the-

clock settlements. This assumes businesses and

financial institutions are ready to support end-to-

end, real-time settlements and reconciliations.

3

9

case study , over 75% of consumer respondents

had a favourable view towards an e-HKD

incorporating offline functionality.

Should this be implemented, careful consideration

should be given to the implementation of robust

measures to safeguard users from the risk of

fraudulent offline transactions.

3

9

Survey sample: 32 consumers and 7 merchants. The pilot involved close to 200 individuals and more than ten merchants.

31

4.2 Technical Considerations: DLT Interoperability and Scalability

Whilst the focus of Phase 1 of the e-HKD Pilot

Programme is on the commercial viability of

potential use cases for an e-HKD, the HKMA

considers it necessary to discuss DLTs, given its

prevalence in the pilots under Phase 1.

A DLT-based design could be better for future

interoperability compared to a non-DLT one, as

transacting entities are likely to share a common

architecture. This could be useful, for instance,

when integrating a wCBDC with each financial

institution’s tokenised deposits, where end-to-end

integration and on-chain settlement are desired.

DLT refers to a technology architecture where a

ledger is replicated across multiple entities, allowing

records to be simultaneously accessed, validated

and updated. DLTs can be useful where a

centralised ledger may be infeasible, such as in the

absence of a central exchange or in the absence of

mutual trust between transacting parties.

A DLT-based design could also enable easier

development and study of digital currencies,

as token standards relating to the issuance of

4

0

DLT tokens (such as ERC20 ), DLT-related

applications, documentation and academic research

already exist in the public domain.

A DLT is neither a prerequisite for a CBDC nor an

e-HKD, and the HKMA remains open-minded to

both DLT or non-DLT based designs (see Figure 12).

In this connection, it would be necessary to

consider whether a DLT could support the intended

scale, level of interoperability, and use cases

without compromising performance, security

or cost-effectiveness.

With that said, a DLT design may be less scalable

in terms of transaction throughput. A non-DLT

based design may also be easier and more

cost-effective to run and govern as it is more

aligned with today’s conventional payment systems.

The HKMA will continue to examine different

architectures for an rCBDC in conjunction with

other collaborative work and projects with the

Bank for International Settlements Innovation Hub

(

BISIH) and other central banks.

Figure 12 – Centralised Ledger versus Distributed Ledger

4

0

Ethereum Request for Comments 20 (ERC20) is an Ethereum-based token standard proposed in 2015 that implements an

API for tokens within smart contracts, enabling developers to build applications interoperable with other products and services.

32

5

Way Forward

This section sets out the next steps for the e-HKD Pilot Programme.

_

_________

Phase 1 of the e-HKD Pilot Programme has

provided valuable insights into the potential

use cases of an e-HKD, and raised a number of

research areas for future study.

There is also a need to delve deeper into use

cases in three key areas, namely programmability,

tokenisation and atomic settlement. Continued

partnership between the private and public sector

will be important in establishing a way forward

that ensures the commercial viability of an e-HKD.

This may include establishing an optimal set of

protocols, common infrastructure and policy.

It will also be necessary to study distributed ledger

technology (DLT) and related designs in detail

given the industry’s strong interest in this area.

One aspect requiring careful consideration is

the positioning of an e-HKD in Hong Kong’s

monetary and financial systems. This includes

understanding its role in facilitating new ways of

transacting goods and services whilst ensuring

banking, monetary and financial stability. It will

also be necessary to study how an e-HKD would

interoperate with conventional payment systems,

and to identify areas where an e-HKD could

complement the industry’s own innovations such

as tokenised deposits.

The next phase of the e-HKD Pilot Programme

will build on the success of Phase 1 and consider

exploring new use cases for an e-HKD. It will also

delve deeper into select pilots from Phase 1,

with a view to further examining business and

implementation issues identified during the pilots.

It is worth noting that launching an e-HKD will

involve external factors beyond those covered

in the pilots, given that the scale and testing

environment of these pilots are substantially

different from real world applications. While some

of the benefits identified may remain valid for a

full-scale deployment, this cannot be assumed to

always be the case. Likewise, minor frictions

identified during the pilots could become more

apparent or even unacceptable to users in a

production environment. These issues will need

to be studied further before any decision is taken.

As part of its outreach, the HKMA will continue to

actively engage the industry, academia and other

stakeholders, as well as participate in international

fora and monitor international developments on

retail CBDCs. The HKMA will also continue its work

under Rail 1 in laying the legal and technical

foundations for an e-HKD in parallel.

Phase 1 of the e-HKD Pilot Programme has

been strongly underpinned by the joint efforts,

experience and talents of the pilot participants,

academia and other stakeholders. The HKMA

expresses its gratitude for the contributions it has

received in the process, and will continue with its

three-rail approach in preparing Hong Kong for the

possible implementation of an e-HKD in the future.

In a similar vein, it will be necessary to study how

an e-HKD could compete in use cases where there

are existing payment solutions, and to identify other

crucial components in achieving and supporting

mass adoption of an e-HKD such as the creation

of a commercial network.

33

34

6

References

1

2

3

.

Bank for International Settlements. (2023, June 20). III. Blueprint for the future monetary system:

improving the old, enabling the new.

Bank for International Settlements Innovation Hub, Hong Kong Monetary Authority. (2022, October 21).

Project Aurum: a prototype for two-tier central bank digital currency (CBDC).

Government of the Hong Kong Special Administrative Region. (2022, October 31). Policy Statement on

Development of Virtual Assets in Hong Kong.

4

5

6

7

8

.

Hong Kong Monetary Authority. (2021, October 4). e-HKD: A Technical Perspective.

Hong Kong Monetary Authority. (2022, April 27). e-HKD: A Policy and Design Perspective.

Hong Kong Monetary Authority. (2022, September 20). e-HKD: Charting the Next Steps.

Hong Kong Monetary Authority. (2023, August 24). Report on Bond Tokenisation in Hong Kong.

Hong Kong Monetary Authority, Bank for International Settlements Innovation Hub Hong Kong Centre,

Bank of Israel. (2023, September 12). Project Sela: an accessible and secure retail CBDC ecosystem.

35

Appendix A: Factsheets / Supplementary Reports

Pilot Participant / Use Case

QR Code / Link

Pilot Participant / Use Case

QR Code / Link

Alipay Financial Services

(

HK) Limited

ARTA-Emali HK Limited

Programmable Payments

Loyalty Programmes,

Programmable Payments

Investments

Government Disbursements

Link

Bank of China

China Construction Bank (Asia)

Corporation Limited (CCB (Asia))

(

Hong Kong) Limited

Programmable Payments

Prepayments

Programmable Payments

Prepayments, Subscriptions

Link

Fubon Bank

Giesecke+Devrient (G+D)

Standard Chartered Bank

(

Hong Kong) Limited

Ripple Labs Inc.

(

Hong Kong) Limited (SCB)

Settlement of Tokenised Assets

Real Estate Asset Tokenisation

Offline Payments

Hang Seng Bank Limited

The Hongkong and Shanghai

Banking Corporation Limited

Programmable Payments

Loyalty Programmes,

Government Disbursements

(

HSBC)

Visa Inc.

Link

Tokenised Deposits

The Hongkong and Shanghai

Banking Corporation Limited

Industrial and Commercial

Bank of China (Asia) Limited

(

HSBC)

(

ICBC (Asia))

Full-Fledged Payments

Programmable Payments

Loyalty Programmes

Offline Payments

Link

Boston Consulting

Group (BCG)

Mastercard Asia/Pacific

Pte. Ltd.

HKT Payment Limited

ZA Bank Limited

Settlement of Web3 Transactions

Settlement of Tokenised Assets

Token-Backed Secured Loan

Link

Note: Any positions or statements made in the above factsheets / supplementary reports as prepared by pilot participants do

not necessarily represent the views of the HKMA. Furthermore, any characteristics described in the above factsheets /

supplementary reports relating to an e-HKD are not indicative, and also do not infer that an e-HKD will be issued.

36

Appendix B: Glossary

Term

API

Definition

Application programming interface

Hong Kong Applied Science and Technology Research Institute

Bank for International Settlements

Bank for International Settlements Innovation Hub

Bank for International Settlements Innovation Hub Hong Kong Centre

Central Bank Digital Currency

ASTRI

BIS

BISIH

BISIH HKC

CBDC

rCBDC

wCBDC

DLT

Retail Central Bank Digital Currency

Wholesale Central Bank Digital Currency

Distributed ledger technology

DvP

Delivery versus payment

ERC20

FPS

Ethereum Request for Comments 20

Faster Payment System

FSS

Fintech Supervisory Sandbox (HKMA)

House equity line of credit

HELOC

HKD

Hong Kong dollar

HKMA

HKSAR

NFC

Hong Kong Monetary Authority

Hong Kong Special Administrative Region

Near-field communications

NFT

Non-fungible token

SVF

Stored value facility

Note: Definitions where provided are solely for indicative purposes in the context of this report, and should not be interpreted

as definitive or conclusive given that they may evolve over time.

37

October 2023